Home—Online trading—Spread betting explained—Spread betting blog—My line in the sand for the Dow
Sep 14, 2012, 02:51
Posted byJohn C Burford
Comments (31)
As I’m sure you’ve seen, the Dow spiked up yesterday following the Fed’s announcement of a third round of quantitative easing. In fact, the markets held their gains, and are still rising this morning as I write.
My guess on Wednesday was that the spike would see a top in some sort in a ‘buy the rumour, sell the news’ type of action.
Instead, we have got a ‘buy the rumour, buy the news’ move! At least, for now...
For someone who is long-term bearish on the stock market, as I have been, this is uncomfortable. I’m sure I’m not alone in being wrong-footed on this rally – all traders are, at times, in this situation.
But the key action for me is to do nothing: stand back outside of the markets and just observe.
For many traders, the temptation would be to throw in the towel and join the crowd – usually at the worst time when the trend is about to end!
Picture the scene. You feel a loss as you missed out on a good move and then you finally jump on it just before a reversal. Result? Another loss! You would have suffered a double whammy – and that could knock the stuffing out of your confidence. It may be some time before you recovered – and you could miss good trades in the meantime.
The best mental position for a trader is one of balance. The worst is being under stress. Avoid stress as much as possible.
Trader tip: The number one rule of trading for me is this: when you are in a losing trade, make sure your loss is as small as possible. That way, you retain the bulk of your account for you to fight another day. The winning trades will come along in due course where you can make hay. That is the point of using tight money management discipline, such as my 3% rule and break-even rule. Plan your losses as much as you plan your entries.
By the way, I’d like to share something with you that I’ve picked up during my decades of trading the markets…
I’ve found that after a market-changing event such as we have seen this week, it’s often the day or two after the news release that can give clues as to the next move – continuation or termination of the rally.
So I’ll be watching the action closely today and Monday for signs of a turn. I’ll tell you what I see in coming issues of MoneyWeek Trader. Don’t miss an issue – I think we’ll get some great lessons.
Meanwhile, with the Dow making almost exponential rallies, are my tramlines still operative? Or do I need to wait for new tramline patterns to develop?
Trader tip: All methods, at times, become temporarily useless at analysing the current markets – and my tramline trading system is no exception. That's OK. When a system works the vast majority of the time, a little breakdown once in a while shouldn't take you out of the game. But when the fog does clear, that is when the method is truly valuable again.
So let’s take a look at the daily Dow chart:
(Click on image above for larger version)
The upper line is the trendline drawn off the major November 2011 low – I have shown this in previous posts.
The lower line connects the three major lows. Between them, we have a large wedge formation.
Yesterday’s rally has carried right to this upper line. If the rally peters out, this would be a great area for it to occur. Remember, most rising wedges resolve downwards.
But recall my last Dow post on 5 September where I noted two competing shorter-term tramlines had crossed and good support was emerging. This was the chart I showed then:
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And this is the chart this morning:
I also said in that 5 September post: “If the market catches another bid and rallies above the 13,150 area (above the upper tramline in my second chart), I would definitely reconsider my stance…”
We now know that this indeed did occur – with a 500-pip rally!
But now, with the market having moved slightly above my upper tramline in the above chart – and having hit my upper wedge line – this is the moment of truth for the rally.
In other words, we have reached my line in the sand.
Later today, we will see the release of important US economic data. Could these be a trigger for a turn-around? Keep watching.
There is no doubt that stock prices are increasingly diverging from what is occurring in the real US economy. We are in a period where bad news (poor job numbers) is good for shares. We have been in this topsy-turvy world before!
But eventually, people will notice the emperor really has no clothes.
Meanwhile, the bulls are enjoying the action, but for how much longer? And will they be able to spot the inevitable turn and book profits, or will they do what most traders/investors do and make the ride up and then back down again?
That is what happened to the famous trader of times past, Jesse Livermore, who made fortunes in the stock market – and then lost them again.
For a hair-raising account of what life was like in the free-wheeling days of yore before the FSA and SEC, I highly recommend Reminiscences of a Stock Operator, which should be on every trader’s bookshelf.
What do you make of the Dow action? If you have any observations to share with the group, we’d love to hear them. Have your say below.
• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:
• The essentials of tramline trading • Advanced tramline trading • An introduction to Elliott wave theory • Advanced trading with Elliott waves • Trading with Fibonacci levels • Trading with 'momentum' • Putting it all together
• Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here . If you have any queries regarding MoneyWeek Trader, please contact us here.
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Leave a comment
(14 September 2012, 03:51PM) Complain about this comment
How can anyone invest with all this interference in the market from government institutions. There is no logic to this fiasco of money printing which just makes everyone worse off eventually.
(14 September 2012, 04:56PM) Complain about this comment
You state you are bearish on the markets, but given the undeniable fact the money has been devalued and debased like never before,what are the alternatives to stocks. What do stocks, gold, oil and commodities all have in common. Answer they are all hard assets, even the hitherto safe haven of the ausie dollar looks now to be at risk from a down turn in China.My view is money sitting on the side and pumped up by QE has to have somewhere to go. And that somewhere is stocks.Governments of every hue have been in a race to bastardize their currencies, is it any wonder we see these ridiculous levels on the DOW and S n P.PS I really enjoy your take on the markets even if I sometimes disagree with your conclusions.
(14 September 2012, 05:04PM) Complain about this comment
I,like I'm sure many others don't understand what it's all about-I've always found eventually 'there is no such thing as a free lunch'-If it's simply a matter of just printing money -why don't they do it all the time-or does someone somewhere or something lose?Any answers?--I can be a bit thick at times so apologies if it's obvious-(maybe it's the imminent US election?)-I'd say something like manipulation but not sure if I can spell itKeep on trucking out there you brave people
(14 September 2012, 05:13PM) Complain about this comment
I have drawn 4 up tramlines. at the moment dow is hovering at the third tramline. based on that I can see support at around 13500 on 2nd tramline and then bounce back again to reach aound 13700 i.e. 4th tramline. lets see what happens
(14 September 2012, 05:17PM) Complain about this comment
Now we agree, since early May the market has been un-tradable for any spread better with bearish sentiment, no tramline or chart in the world could have have made a bearish trader a winner since declaring 'Dow due for a Fall' back in July. Most spread betting bulls will have lost out as well, only the long term nerves of steel Bulls will have held positions from July until today. Every betting Bear will have been battered. The best and only sensible advice is to stay out until a direction is established, ok you miss the first leg and possibly the second leg, better than getting thrown out of these M and W trading markets. I went short when GS called the Top of the S&P at 1215! When good news is bad and bad news is good the lunatics must be running the asylum. Physical Gold and Silver the only way to go, spread betting it is hard core and I get burned more often than not
(14 September 2012, 05:41PM) Complain about this comment
Great read as always John. "Reminiscences" is far and away the best investment book I have read - and I've trawled through too many. Fully agree. Also, worth remembering that everytime Jesse Livermore lost his fortune it was because he didn't follow his trading rules. We've all been there! Keep up the good work, much appreciated.
(14 September 2012, 06:10PM) Complain about this comment
Hi John,I Really enjoy your analysis and read it every time it is shared. What I'd like to say is that whereas in decades gone by the general public always felt that stocks could only go up and that all dips were temporary..they of course lost their shirts on many occasions! However, what I have noticed in the past few years is that everybody has become a perma-bear. The expectations of the masses have taken a complete reversal. This makes me think we are in for the rally of a lifetime as everybody keeps trying to short the market only to get smashed by the bulls every time. I am no Elliot wave theorist but could we not be in the process of beginning a multi year 3rd wave up? Your thoughts would be most interesting.
(14 September 2012, 06:12PM) Complain about this comment
I traded the DOW on Friday following tight Elliott Wave patterns.From 11:00 am to 12:20pm GMT, a beautiful diagonal formed on the 5 minute time frame.This pattern executed itself to perfection and the final descending climax creates at least part of a possible wave 2 that looks to end around the 13567 level. I suspected this could not be a top as the wave count to here is only wave 2 and the market pushed up just after I stopped trading at around 5pm GMT.Perhaps this is a forecast of the future develops on a larger scale in higher time frames. Best Wishes for your trading.P.S. I like the large wedge that John showed today, I interpret that same wedge as an ending diagonal.
(14 September 2012, 06:56PM) Complain about this comment
Hi JohnGood to see the reflection over what has happened, readers should take note of comments and consider them, not criticise without experience.Your readers need to learn from what happened and what was not on their radar watching both waysie USD, gold and oil.WAITis the most important rule now.This looks like the 5th wave of the 5th bull wave is completing,target just above 13500.The USD has completed its head and shoulders reversal.There must be a considerable rally on the USD up to about 81.5.Then expect a fall back.Anybodys guess where we go from there. But with now a serious potential top on ALL the indices , be ready for a strong reversal, we could well see your big fall starting soon.Joe
(14 September 2012, 08:09PM) Complain about this comment
Whenever an announcement of further QE is being released, the markets go up a great deal and then go sideways for a few days, they then follow the trend which in this case is UP so I can see the Dow going higher by another 500 pips in the next 2-4 weeks, same with the Euro and GBP so I will be watching the sideways next week and be ready to take advantage of the next breakout.
(14 September 2012, 09:55PM) Complain about this comment
Hi John, we say here in Scotland "When in Doubt do Nowt" or as you have said, do nothing. Very relevant today. Topsy turvy is indeed the way it is and how bad news is good for stocks, beggars belief! I learned the lesson when I started out, about jumping on board because I didn't want to miss out and got burned badly, not once but several times. I was watching and looking for an opportunity to get on board last night and into today, but it was just not there . I closed my charts down this afternoon and decided to wait. As always enjoy your e-mails very much and especially appreciate your frankness. Thanks and have a great weekendSusan
(14 September 2012, 10:49PM) Complain about this comment
I try to keep the wolves from the door by trading the daily swings in the Dow however I also try to look for swings and then to hold (as Jesse) which can last one or several years in such as Oil, Gold (still holding since 2001) and of coarse the Dow which I have held since middle of 2009. But now like John I am finally turning bearish and looking to reverse for the long term. I dont do fibs or waves and anyone lazy like me who can plot 20 years of Monthly bars with a 26 month MA and a 14 month RSI will clearly see why I feel like I do. I do believe now we are near the top but there is just a chance a last push to the top made end of 2007 around 14000 is possible so best not jump the gun. Will October prove to be the month again ?
(14 September 2012, 10:56PM) Complain about this comment
@BroncoBill - Hi Bill - would be interested to hear more?
(14 September 2012, 11:25PM) Complain about this comment
Sorry Richard Lee but stocks and gold have (so far) not moved together in same direction as I think you are saying. In 1999 it took 42 ozs to buy the Dow today its 7.66 ( FTSE 24 ozs today 3.34 ). For anyone interested to keep this important Dow/Gold ratio chart on their radar plot out 20 years Monthly bars or line with a 36 month Bollinger Band. You will notice that since 2001 the ratio has remained below the MA and that right now the bands have narrowed up. This implies the ratio is in for another multi-month/years big move. If the ratio heads north will mean gold to stand still or drop while stocks rise. If it heads south gold has to stand still or rise while stocks drop. Something has to give, maybe soon....North or South ??
(15 September 2012, 03:49AM) Complain about this comment
What appears at first sight is not truth.The real plan of Bernanke and Draghi is to colonize developing countries and middle class and poor countrymen in their own countries.They can do it with mighty weapon systems they have but in todays world it will not look nice on internet and facebook and all news channel and hence this subterfudge of money printing.What I dont understand is why all gold bugs are screaming about this as this action is helping their dreams become reality.
(15 September 2012, 06:50AM) Complain about this comment
Hi I am not suprised about the move at all. I have been following Dr Burton analysis and agree with all his predictions, I am bearish myself all long. Something was missing in all this is politics. Recently I was wonderning about the support of the dominant financiers and i'm getting the answer, their support is for the president Obama and the prouve of that Mr Romney was complaining. This is about the feel good factor. Romney would prefer it redish, democrates prefer it greenish. Many thanks
(15 September 2012, 07:45AM) Complain about this comment
If you draw a line from the high of 30th July through the high of the 7th August (Metatrader chart) this is where the spike of 14th Sep hit
(15 September 2012, 09:46PM) Complain about this comment
We must all learn instead of critisicing and see what was on the radar! He obviously needs to learn to stop contradicting himself with each commment he writes, such as "anybodys guess where we go from here" after comment last week "FYI" this is how it is going to happen. Also, " I am going to a new job and will not have time to comment any further! Has critisiced the author from the outset. Bad joke or idiot?
(15 September 2012, 10:54PM) Complain about this comment
@Susan- Hi Susan, when you say you would be interested to hear more I assume you mean how I plan to reverse from bull to bear. If you've plotted the chart I described above then draw a line connecting the three low points made on the RSI since 2009. When this upward sloping support line is broken I will then close out my long trade since 2009 and then go short with Half of my stake and place a very wide stop. When and if the 26month MA gives way I will then place the other half of my stake. Have a look back say 20 years and you will see how this simple MA has been a fantastic support or resistance... but of coarse is no guarantee for the future.
(15 September 2012, 10:59PM) Complain about this comment
@Susan-continuedI have to say that in this uncertain world there are many things that could happen at any time to knock the markets down. However, strictly looking at the monthly chart I would say there could be more upside to come and it could be more than we think. Dont do what Jesse Livermore did, he saw a pile of dollars and ran towards it with his barrow and then tripped over. Good luck.
(15 September 2012, 11:03PM) Complain about this comment
@BroncoBill - Hi Bill and thanks. You on facebook or twitter?
(16 September 2012, 08:59PM) Complain about this comment
@Susan- Sorry Susan no facebook or twitter but thanks for asking.
(16 September 2012, 10:29PM) Complain about this comment
Forgot to mention this John but have you noticed the huge downward sloping tramline which gives a lot of additional weight to your bearish stance and that we may be near a long term top. On a Monthly chart draw a support line connecting the lows made in 1998,2002, and 2009. Copy this bottom tramline line and move up to high made in 2007. This top downward sloping tramline was nigh on touched by the recent rally high. The next days/weeks are going to be interesting. From top to bottom of this huge tramline is 7000 pips.
(16 September 2012, 11:48PM) Complain about this comment
@BroncoBill - thanks Bill and no problem. About your tramline, this is the big one that us bears have been waiting for its just a case of when!
(17 September 2012, 09:16AM) Complain about this comment
Is being a long-term bull or bear relevant to trading (as opposed to investing)?Is drawing a red line in the sand something you can do with markets? They'll go where they want to when they want to.Since John's email the Dow spiked up further to over 13650. As I write it is trading around 13570. It could well return to that high and retreat again, perhaps destined for a bigger fall, fall from here without returning to that high or even head for 13700. No-one knows, surely. Trading, if it's about anything, is about handling unpredictability using probability as a key ally.Elliott wave theory appears to involve an attempt to predict which it has yet to demonstrate as far as I can see...But I use tramlines, or trend lines as I know them.
(17 September 2012, 04:33PM) Complain about this comment
I tend to agree with mr. also, as regards these big trends some of you see, are you not taking into account the massive distorting impact of central banks? this takes me back to an assertion John made in the wake of Draghi's remarks that sparked this rally (or at least an important leg of it), which was that Draghi's comments were basically irrelevant: "the news follows the market." Really? in the wake of subsequent Draghi appearances, and now Bernanke coming out and basically saying he will do whatever it takes to pump the stock market higher, it's pretty clear that there are forces moving the market that make a mockery of most charting attempts. it seems unwise to me to ignore these forces, let alone try and trade against them. It would be good to see this revisited, in case i missed the point or something.
(17 September 2012, 04:45PM) Complain about this comment
Yes, IJ, I remember making a similar point around the time of the Draghi statement at the end of July.But I am a technical trader relying solely on charts, trading what I see, which is why I still cannot 'get' EW theory, or, rather, EW practice! I read all John's emails in the hope of seeing the light but I am put off by the frequency with which EW counts have to constantly be reframed.
(17 September 2012, 05:17PM) Complain about this comment
mr - nothing against relying on the charts. But if you "solely" rely on them, how do you account for market-distorting newsflow / fed meetings etc. do you just sit on the sidelines? some big trader (i think paul tudor jones) said one should always be "flat" going into a Fed meeting. Anything else is pure gambling. Makes sense to me.
(17 September 2012, 05:32PM) Complain about this comment
I agree with whoever did say that - I've seen it said more than once.What I do is either enter a trade with a tight stop if I have a feel for what might happen but if, as is usually the case, I wait for the news and trade accordingly.So, for example, I went short of the Dow on Friday but still got in too soon so am waiting for a fall from here or to add to it if the high is revisited.
(17 September 2012, 06:05PM) Complain about this comment
...but if not, as is usually the case...
(17 September 2012, 08:06PM) Complain about this comment
There's an interesting tramline on the Dow 1 day chart now, the lower one touching at the lows around 5 June, 25 July & 56 September and the upper one the highs of 22, 29 May, 20 June and 14 September.No doubt there are others but I'm ready to add to my short trade around 13660-75 or for a fall to about 13450 quite soon, possibly both in that order.Any advance on that?
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